PALESTINIAN leader Yasser Arafat said yesterday that the Palestinians were ready to work for an immediate ceasefire with Israel, but he stopped short of declaring a truce in the Middle East conflict.

Arafat, speaking his West Bank headquarters of Ramallah, also said the Israelis were planning a major military operation against the Palestinians. The Israelis have warned they are prepared to retaliate for a suicide bombing on Wednesday that killed 20 people at a seafront hotel.

Arafat said the Palestinians had informed US envoy General Anthony Zinni of "our readiness to work on a ceasefire, an immediate cease-fire." Zinni has been attempting to arrange a truce for the past two weeks. "Unfortunately, there are some aggressive preparations by the Israelis to do a wide military operation against our civilians, our cities and our refugee camps," Arafat said.

He said Israeli military action would undermine a peace initiative approved yesterday at the Arab summit, which calls for Arab states to normalise relations with Israel if it withdraws from land captured during the 1967 Middle East war.

Israeli Prime Minister Ariel Sharon's Cabinet was meeting late last night to consider its response to Wednesday's suicide bombing, which targeted people gathered for a Passover feast in the Mediterranean town of Ne-tanya.

Amid the diplomatic manoeuvring, suspected Palestinian militants opened fire last night at a Jewish settlement near the West Bank town of Nablus, seriously wounding at least four residents, rescue workers said. No additional details were immediately available from the attack at the Eilon Moreh settlement.

The Wednesday night bombing was widely seen as a watershed because of its deadliness and timing. "They attacked innocent Israelis on one of the most sacred nights to Jewish people, Passover," said Gideon Meir, an Israeli government spokesman.

Israeli officials stopped short of formally abandoning US-backed truce efforts and suggested they were hoping the Palestinians would at the last minute agree to the truce and crack down on militants who oppose ending the 18 months of violence.

But there were also indications that

Israel was strongly considering military moves even more far-reaching than the incursions into Palestinian towns and refugee camps which several weeks ago killed scores of Palestinians and brought on a tide of international condemnation.

Sharon spokesman Raanan Gissin said Israel had made it clear to the United States that it reserved the right to retaliate harshly if Palestinians carried out a major terror attack during cease-fire talks. "Israel will have the full right to self defence and will use appropriate measures to punish all those who perpetrated and assisted in this attack," he said.

Speaking on Israel TV, military affairs analyst Ron Ben-Ishai said senior army officers and Defence Minister Binyamin Ben Eliezer had come up with a plan for incursions into Palestinian territories to capture suspected militants and deter more attacks.